Do the fundango

Crack open the bubbly and strike up the band. It's not just the big end of town that made big money in 2006-07. The legions of investors in managed funds have ridden the wave of booming investment markets and will receive double-digit returns for the year. Many will enjoy returns of more than 20 per cent, and a lucky few will see returns as high as 80 per cent.
The place to be was in the Australian sharemarket, which rose by almost 29 per cent during the past 12 months, including dividends.
According to figures provided by research group Morningstar, share funds reported average returns of 25 per cent after fees, and the strength of that performance trickled down into the returns of multi-sector or balanced funds which reported average returns of 12 to 15 per cent for the year - depending on their level of exposure to equities.
Mid-teen returns can also be expected by the bulk of super fund members, with early super fund returns coming in at about 15 per cent.It was a year when investors were well rewarded for taking on risk.
The stand-out performers were small companies and geared share funds, many of which returned more than 40 per cent.
The top 10 funds all returned more than 50 per cent, and the best performing fund, Macquarie's Small Companies Fund, returned an impressive 82 per cent.
"After four very good years investors should be happy with their funds," says Morningstar head of research, Anthony Serhan. "Even over 10 years, multi-sector funds have returned around 7.9 per cent a year, and that includes one of the worst bear markets of the past century."
The strength of both the economy and the sharemarket meant few investors lost money in 2006-07. But there were still disappointments.
The biggest losers were funds investing in Japan, with four funds losing more than 9 per cent.
The worst of these was Skandia's Fidelity Japan Fund, which was down 16.97 per cent for the year. BT's Global Bond Fund incurred the second heaviest loss of 13 per cent.
Serhan says the BT fund "got crunched on currency, as it is one of the few global bond funds that does not hedge out all currency risk".
Funds specialising in bonds and cash (fixed interest securities) were generally left behind by the booming sharemarkets, with many reporting returns of less than 6 per cent.
International share funds also showed patchy performances depending on where they were invested and how exposed they were to the strong Australian dollar.

The average diversified international fund returned about 9 per cent, although funds favouring small companies and emerging markets did much better and those concentrating on Japan and North America struggled.
Serhan says strong markets also disguised the fact that a growing number of managed funds failed to beat their benchmarks.
He says the average small company fund return of 44 per cent might sound impressive, but it was achieved in a market where the main barometer, the Small Ordinaries Accumulation Index, was up by 44.4 per cent - meaning many funds hitched a ride on the market.
The average fund specialising in the shares of large-capitalisation companies failed to achieve the benchmark return of 28.7 per cent and the average property securities fund returned slightly less than the 25.9 per cent index return.
"Australian equities funds have been struggling to beat the index over the past two years," says Serhan. "If markets are going up by more than 20 per cent a year, funds are less willing to diverge from that. You would expect returns to gravitate around the index because clients aren't going to complain too much. We also have the situation where a stock like BHP is constituting a greater slice of the overall market and fund managers are less willing to take overweight positions."
Serhan says some of Australia's most popular funds have also underperformed in recent years - including the largest fund in the market, Platinum's $9.7 billion International Fund.
A strong performer when times are tough, this fund returned just 6.18 per cent last year, compared with 23.55 per cent for the top-performer in the large-cap category, the Equity Trustees Intrinsic Value International Sharemarkets Fund.
"In a rising market, Platinum will always struggle a bit because it typically holds short positions," Serhan says. "The portfolio still has a lot of defensive characteristics and will trail when things are going well."
In the local market, Macquarie's Small Companies Fund has been the stand-out with annualised returns of 51.43 per cent for the past three years.
Portfolio manager Neil Carter believes small companies are an area where fund managers can add real value through smart stock selection and active management.
"The market is inefficient," he says. "The big brokers prefer to focus on big companies, so when we go to visit companies we are generating research that can add a huge amount of value.

"Small company portfolios are also very selective. We invest in about 60 stocks out of a potential universe of 1800 so we're cherry-picking the best 3 per cent. Large-cap fund managers are trying to pick 50 stocks from 150 or 200."
Companies that have done well for the fund this year include Neptune Marine Services and AED Oil.
Carter says Neptune is exporting new underwater dry welding technology, which will generate massive time and cost savings for repairs of gas platforms. Macquarie bought the stock on a price-earnings multiple of just four; it is now trading at a conservative 13.
He says the fund bought AED Oil, which operates in the Timor Sea, at around 80c a share a year ago and it is now trading at around $8.50.
Both Macquarie and Australia's second-ranking retail fund, Pengana's Emerging Companies Fund, tend to focus on companies capitalised at $100-$500 million.
Pengana find manager Steve Black refers to this as the "happy sweet spot" in the market, where original research can add big value.
Pengana's fund returned 70.78 per cent last year and has returned a total 171 per cent since it opened in November 2004. Like Macquarie, Pengana puts a lot of effort into stock picking.
Black says it looks for quality management and earnings fundamentals - particularly a growing cash flow. But, unlike Macquarie, it does not invest in resources, though it does invest in mining services companies, which have been a substantial contributor to results this year.
Black says Pengana's better-performing stocks include Mineral Resources, which manufactures crushing devices for the mining industry, Australia's largest car dealership, Automotive Holdings, and Cabcharge.
And while neither expects to repeat this year's returns (though Black says he and joint fund manager Ed Prendergast will "do our darnedest"), they do believe they can continue to outperform.
"Valuations are not excessively expensive and the Australian economy is firing on all cylinders," Carter says. "This is one of the classic boom times when you want to be strong in equities."
Across the wider Australian sharemarket, the best performers were the geared share funds, which use borrowings to leverage their returns. Four of the top five large-cap share funds were geared funds, with the best performer, Colonial First State's 452 Geared Australian Share Fund, returning 53.64 per cent.
This fund is managed by former Perpetual fund manager Peter Morgan's boutique firm 452 Capital, and focuses on finding quality companies trading at lower values.

It is around 50 per cent geared, which accentuates returns when markets are rising but will detract from returns in a falling market.
As a comparison, Morningstar's data shows the CFS 452 Australian Share Fund returned 27.15 per cent over the past year.
BT, Advance and Perpetual also have geared share funds that made the top five, all with returns of more than 40 per cent.
The top performing ungeared Aussie share fund was the boutique absolute return fund, the FSP Australian Equities Leaders Fund, with a return of 44.3 per cent. Other top-performing ungeared large-cap funds included Australian Unity's Platypus Australian Equities Trust (37.09 per cent), Perpetual's Ethical SRI Fund (36.73) and ING's Select Leaders Trust (33.92).
Leverage also played a role in the property securities market with units in the top performing fund, Australian Unity's Property Securities Growth Fund, returning 43.73 per cent for the year compared to a 26 per cent return for the S&P/ASX 200 Property Trusts Accumulation Index. While it doesn't borrow, Australian Unity has income and growth units.
The growth units are entitled to a higher proportion of the growth in the portfolio.
The fund's ordinary units returned 25.51 per cent for the year and the income units 13.28 per cent. But in June, when listed property trusts lost 4.5 per cent, the growth unit fell by 8.8 per cent.
"It shows how leverage can accentuate returns," Serhan says.
Other top performing property securities funds included Equity Trustees' SGH Property Income Fund (29.11 per cent), UBS's Property Securities Fund (29.10 per cent) and Pengana's Property Securities Fund (28.74 per cent).
For multi-sector funds, Serhan says the key to performance last year was how heavily funds were invested in Australian shares and property and, to a lesser extent, whether their international exposure was hedged against movements in the Australian dollar.
Four of the top five performers were 80 per cent or more invested in growth assets. Russell's High Growth Fund returned 21 per cent.
Serhan says the second-ranked fund, ING's Tax Effective Fund (20.64 per cent), benefited from holding only Australian shares, which performed better than their overseas counterparts.
The Macquarie Managed Growth, ipac Pathways 95, and Mercer High Growth Plus funds also made the top five with returns of around 20.6 per cent.
But it was in international equities where the biggest divergences occurred.

Serhan says hedging made a difference of about 15 per cent to the returns of global share funds and many of the top performers had hedging strategies in place.
The best performing diversified large cap global fund was Equity Trustees' Intrinsic Value International Sharemarkets fund, which returned 23.55 per cent for the year against an index return of about 9 per cent.
Equity Trustees head of fund management, Harvey Kalman, says the fund uses selective hedging and was about 50 per cent hedged last year.
He says it differs from most international share funds in that it uses research by Scotland's Value Track to decide which countries to allocate funds to. The fund then buys financial products that give it exposure to those markets. There is no stock selection involved, which Kalman says means the fund can be used to complement funds that focus on active stock selection.
Other top performing global funds included AMP's Future Directions Hedged International Share Fund (23.42 per cent) and Skandia's Custom Choice International Share Performance Fund (22.99 per cent).
In the fixed interest and mortgage markets, Serhan says higher performance was usually due to higher risk.
The top ranked Australian bond fund, the SCM Optimal Choice Coupon Securities Fund, returned 6.78 per cent, the top global bond fund, ING's Credit Suisse Syndicated Loan Trust, 7.91 per cent, and the top mortgage fund, Mirvac's AQUA High Income Fund, returned 9.46 per cent (see sidebar above).
"The better performing bond funds either held shorter-dated securities which gave close to cash returns or picked up extra yield by moving into riskier credit assets," Serhan says.
"Bonds were definitely the weakest category but they're not gone and done with. It wasn't that long ago that long-term bond returns were similar to those from shares.
"One of the issues for investors is that many people have been moving away from bonds but no one will ring a bell to tell them when they'll need them most. They're still important as a defensive asset class."

Taxpayers will try almost anything

With yet another crazy tax year just finished, Julian Lewis files his annual tax return and discovers that it was good news for strippers in Europe but not so good for tax evaders in India.

WHILE most of us idly ponder whether the new lower income tax rates that apply from July 1 will be enough to pay for the inevitable increase in our accountant's fee, there were taxpayers (and dodgers) from around the world last tax year who had tax issues of a very different nature.
For example, when a Norwegian appeals court ruled that striptease was an art form - a form of dance combined with acting - and should be exempt from value-added tax (their GST), the news spread quickly to Amsterdam.
The owners of the Diamond Go-Go Bar in Oslo refused to pay VAT of 25 per cent on entry fees on the basis striptease dancers were stage artists like sword-swallowers and comedians, deserving of the same status.
A Dutch judge wholeheartedly agreed. He ruled peep shows, where sex workers performing strip shows and explicit acts could be watched from booths (even by judges, should they wish, presumably), were a form of theatre, entitling club owners to a tax break.
"Admitting customers to peep shows is equivalent to admitting them to a theatre performance," stated the ruling, adding that: "The erotic character of the performance does not diminish that."
Tax authorities in India used the art form for a different means.
In the Indian state of Bihar last year the cash-strapped government decided to collect overdue tax revenues of around $14,000 by employing bands of singing eunuchs gaily clad in saris to sit outside the homes of tax defaulters.
The eunuchs, feared by many in India, were paid a 4 per cent commission on any tax collected and staged sit-ins and beat drums outside the homes of tax defaulters. According to reports, exceptional results were gained within 48 hours by this unusual method.
This could give Australian authorities something to work with if they wanted to cut costs and speed up Operation Wickenby, Australia's biggest-ever tax evasion crackdown.
Last year it was estimated Wickenby would bring in $323 million over the next four years, the amount of lost revenue from high-profile Australians using offshore trusts to avoid tax.
But given the investigation will cost an estimated $300 million to run, it will only do slightly better than break-even. A eunuch solution could be called for.
Romania, meanwhile, faced its own unique tax problems.
For every officially registered witch in Romania - one, in fact - who registered to pay tax on her services, there were another 4000 or so whose tax-free spells were costing Treasury millions.

Services including star-gazing, fortune-telling and talking to the dead are big business in Romania. So is vampirism, spells, hexes and curses, with companies known to consult the experts.
Witches even had a stand at a recent export fair. But as of last year, only Gabriela Ciucur, who sees up to seven clients a day and charges about $15 a session, was giving official receipts and toeing the official taxation line, leaving authorities to consult their legal crystal balls to gather details of witches and their incomes.
Not that they were allowing authorities to sweep them off their feet, or even their brooms.
Maria Campina, 57, the self-proclaimed White Magic Queen and leader of the Romanian witches, said: "Why should we pay taxes when we don't get anything from the state?
"We already do a lot for our country. Whenever there is an important Christian celebration, we perform a ritual to protect the country from natural disasters.That has to be worth more than any tax income."
But while Romanian tax authorities were ducking any potential curses, China's tax office launched a drive last year to persuade the 1 million people estimated to earn more than $20,000 a year to pay income tax.
Not surprisingly, there were not that many takers, with only 3000 volunteering, and almost half of those living in Beijing.
China Central TV, in its coverage of the tax office's disappointment at the poor response to its appeal for extra taxpayers, said that in some cities not even a single person had registered to pay.
Not surprisingly, only 7 per cent of China's government revenue comes from personal income tax.
Another Chinese tax-raising idea had a very different result, though, after city authorities in Zhangzhou, in China's southern Fujian province, decided to give the children of high-taxpaying parents bonus points in their public exams.
This, as you would expect, caused outrage in Zhangzhou where, as elsewhere in China, there is a ferocious battle for access to the best schools.
And given most people in China pay no income tax, with the amount of income declared for tax purposes commonly viewed as negotiable, big taxpayers are regarded as unusually generous and public-minded.
Income tax may be negotiable to some extent in China but in the Philippines it can literally be a raffle.
For there, in another innovative tax-raising idea that would appeal to many Australians, every time you send in a valid tax receipt it becomes an entry in a lottery that could easily be promoted here as Taxlotto.

And if your receipt is one of the five lucky ones picked out, you become an instant millionaire. And even if a million pesos is only worth about $25,000 in Australia, it will still get you well ahead of the pack in a country where about half of the population lives on about $2 a day.
Of course, some have little sympathy for the poor and blame the tax system for their troubles, such as the owner of an upmarket antiques shop in New York who early this year filed a $US1 million ($1.16 million) lawsuit against a tramp living on the footpath outside his shop.
Accusing the man of deterring customers by "performing various bodily functions such as urinating and spitting" on one of the world's priciest retail strips, he said the homeless man was blocking his lavish window display, then featuring a $26,000 19th-century mahogany bench.
Defendants of the homeless man, who huddled over a warm grate in front of the shop, said he had the same right as anyone else to occupy the public space.
And why is tax involved? Because the owner says he has spent two years trying to get the homeless man to move and, although he has called the police, they refuse to intervene on the grounds that the man is doing nothing illegal, leaving the owner to say: "I pay taxes in New York City and some of that is to maintain decent shelters. He should take advantage of that."
But if all this tax business is too much to handle, perhaps you should consider buying a tax haven, such as the one for sale earlier this year.
You might need more than just the money because a helicopter or boat is required for access to Sealand, a former World War II fort in the North Sea.
Settled 40-odd years ago, and declared a state with its own self-proclaimed royal family, the tiny principality began life as Roughs Tower in 1941, a 550sqm steel platform stuck on top of two concrete towers about 11km off the coast of Harwich, in eastern England.
Inviting offers of eight or more figures for the property with uninterrupted sea views, complete privacy, and a status as a tax haven - it is beyond the three-mile (4.8km) limit of Britain's waters - the family who have occupied Sealand since 1967 have fought hard for their disputed nation status.
Former British army major Paddy Roy Bates declared it a state in international waters when he occupied it with his family and dubbed himself prince.
The Royal Navy tried, unsuccessfully, to evict him and Roy, as the naval forces entered territorial waters, fired warning shots from the former fort. After a judge ruled in his favour that Sealand was outside UK government control, in 1974 Roy introduced a constitution, a flag, a national anthem, currency and passports.

When Dutch and German businessmen visited Sealand in 1978 to discuss a business deal, they attempted to kidnap Roy's son but were overpowered and held as prisoners of war.
For such are the powers of having your own fort, tax haven and nation.
For the rest of us, who have to make do with the little luxuries of life, such as listening to Elvis Presley's recording of Teddy Bear or visiting a teddy bear display in Somerset, England, there is no escape from the taxman.
A dog employed last year to guard the collection - that included a valuable Steiff bear named Mabel from 1909 that was once owned by The Pelvis himself - went berserk and inflicted fatal damage on some of the exhibits.
This included the aforementioned Mabel, who lost a 5cm lump of fur from her stomach and had her head all but severed, incensing her owner who had paid $100,000 for her at an auction in, where else, Memphis, in the belief she had once belonged to Elvis.
And the tax connection? Barney the guard dog was a Doberman Pinscher, a dog first bred by a German tax collector around 1890 to protect him from his clients.
May neither you, nor your accountant, nor even your tax assessor ever have such a need. For tax, like everything else in life, is negotiable - sort of.